Captive/Dedicated Offshore Development Centers - are they really worth the effort?

I have been associated with the offshore space most of my career. I worked initially on the vendor side in delivery, account management and managing P&L for a region. I then moved into a US delivery organization initially to set up a global sourcing strategy and later on in to managing IT delivery using a mix of employee and third party.

I get a lot of questions on challenges faced by captives, JV's and dedicated development centers and thought this would be a good topic for this blog. This is based on my professional experience and research as well as interaction with colleagues in the industry. I have broken the topic into sections which I believe are core issues.

To keep things simple, when I refer to captives, I am generalizing the discussion of captives, dedicated (and owned) offshore development centers and joint ventures as they perform the same function, operate in the same way and have similar benefits and challenges. I have chosen to compare captives against the top players in the offshore industry. Captives are established by mid to large corporations and the alternative to setting up a captive is to work with a TCS, Cognizant, Infosys type organization. In fact, as I explain below, captives often have to coexist and compete with these vendors.

Attracting Top Talent - The education system in India generates hundreds of thousands of engineers every year but the general feeling is that this is a case of quantity over quality. One only has to look at the schools the top industry players recruit at (by way of onsite campus events) and it is clear of where these companies believe they can find their top talents. Just to be clear - I am not talking about IIT's and IIM's but engineering schools And companies like TCS, Cognizant, Infosys and Wipro hire anywhere between 10,000 to 50,000 fresh engineers every year so you bet they have perfected the process to make it efficient and worth their while. I do not mean to degrade or imply that the schools that are not able to attract these companies for campus recruitment are in some way inferior. But if companies want to find top talent - and in large numbers, they are likely to have better luck at some schools than others. There is intense competition to hire the top talent at each of these top rated schools between the big players itself, so it is reasonable to assume that a small company with a no name recognition would have a tough time competing with the biggies in attracting top talent from the top schools. You can still find good talent all over the country but it will take a lot more investment in time and money.

Training - You have to train new employees on process, methodology, standards, domain knowledge as well as update technology skills. Large organizations have dedicated infrastructure (e.g. Infosys's Mysore and TCS's Trivandrum facilities) that are in use pretty much all the time which makes the process efficient as well as cost effective. Smaller organizations cannot maintain dedicated infrastructure and have to pull out resources from other areas for training which impacts normal business.

Growth potential and Retention - Typical captives centers have built for a certain capacity and might take a few years to reach full capacity. However it is extremely rare in my experience that these centers continue to grow year after year after reading steady state and this implies limited growth opportunities for the employees. Every single software employee working in India is driven, ambitious, career oriented and looking to be a Project Manager in 4-5 years. This kind of career growth is simply not possible in a steady state captive which results in attrition. Employees who have reached their full productivity levels after 2-4 years are easy picking for competing organizations. This is frustrating part for the management sitting in the western world - "It has taken us three years to get these employee to understand the domain - how can they just walk out like that"? Sooner or later this ends up increased compensation and other perks which don't really solve the problem but do alleviate the symptoms.

Costs - Captives, more often than not, follow the parent organizations policies. This would include swanky offices, business class travel, generous entertainment allowance, corporate events and more. I was surprised the first time I heard about a team lunch at a 5 star restaurant but then realized this was the norm. However the biggest cost for the industry has always been labor and this is where the difference is remarkable particularly at senior levels where compensation levels are 2-4 times as much as what the top executives at the top players would make. The situation is even more extreme when organization depute executives from the west to manage these captives and provide top class accommodation and other benefits. The end result is that the per hour development cost of these captives turn out to be equal, if not higher, even though captives do not have sales and marketing costs!

Flexible workforce - It is difficult, if not impossible, for a captive to respond to short term requirements. If a project requires say 50 resources with a new skillset for building a new application, a captive cannot find their resources overnight and, more importantly, cannot release these resources after the project is completed. A larger organization can do this effectively. This limits the effectiveness of a captive to steady state efforts which generally turn out to maintenance and support work or where the long term technology strategy is very clear.

Captives v/s vendor competition - In most organization you will find situations where the captives are asked to compete with 3rd party vendors and this a great way to get a comparison and keep the captives in the game. However captives are cost centers and struggle to provide innovative pricing and upfront investment in emerging technologies not knowing if the projects will come through or not. More often than not, vendors invest a lot in onsite relationship building. As a result middle management decision makers on individual projects prefer to use vendors because of the relationships and track record. The use of captives, in spite of all good intention on part of the corporate organization, is seen as a forced directive and often considered a necessary evil.

Conclusion - Captives make sense when set up to protect IP, trade secrets or propriety knowledge. However the driving factor for the vast majority seems to reduce costs presumably driven by the high gross margins of the top players. The top players have economy of scale and control costs very closely. Although it is possible to replicate this model, it is certainly not easy. Organizations need to evaluate very carefully if these challenges can be overcome - and more importantly, if the effort involved in overcoming these challenges is really worth it.

Thoughts on Vivek Wadhwa's recent post on "The Tech Industry's Darkest Secret - It's all about age"

Vivek Wadhwa published this article a couple of days ago and expected the article would provoke anger, outrage and denial. Judging by the comments posted on the article he wasn't far off. (https://www.linkedin.com/today/post/article/20130422020049-8451-the-tech-industry-s-darkest-secret-it-s-all-about-age?trk=prof-post)

I haven't seen the Brown and Linden's analysis to see if there is correlation between the unemployment and age or if the comment regarding unemployment was an inference from the rate of salary increases for a given age group. I presume it was inference since no data on unemployment is quoted in the article.

I am not sure if the tech industry would be so different from the non tech where skillset of the labor force is a factor. The salary premium commanded has to be based on the value and availability of the skillset - a simple factor of demand and supply. We do need to allow for significant inefficiencies as this is not a commodity market place - after all you cannot simply download an employee with a specific skillset from the internet.

I would expect salaries of tech workers to increase dramatically early in the career, or in their 30's as Vivek mentions, since out of school grad's start at a comparatively modest level as their skillsets are not readily deploy-able and it takes time and effort to bring them up to speed with domain knowledge, processes etc. The demand for employees that have been trained and become productive increases exponentially in the first few years and companies have to offer dramatic increases to retain them. You still lose a good percentage of employees in the early years and employers that routinely hire fresh graduates plan for this attrition. It is natural that employees with Ph.D's (and other higher degrees) would demand a higher salary at the beginning of their career as opposed to those with 4 year undergrad degree. One would expect that salaries over a period of time for all employees performing similar roles would gravitate towards the mean. So if you started of with a higher base, you should expect to see your salary increases to slow down and as is the industry norm today, keep pace with inflation. That may explain why Ph.D's see lower increases compared to those with bachelors after age 50.

Youth does have an advantage in start-ups but it is not all about hot skills, stock options and pulling all-nighter's but about availability. That demographic is more likely to have a very short horizon and not attach same amount of importance to health benefits and retirement plans. A typical "non-youth" employee with a family to support is likely to care more about job stability and benefits and less about the stock option lottery.

I would even stick my neck out and talk about a different problem being faced by the tech industry today. The tech industry is not just about Google and Apple but thousands of companies that have been around for tens of years. These industries have existing infrastructure worth billions and most of it is in "not so cool" technologies. These system are not going away anytime soon and are supported by loyal, dedicated and hard working employees who have been around for a while and have no intention of quitting their current job and starting life all over. These employees have the experience and the knowledge in their heads to keep these systems up and running. Replacing these employees with youth and transitioning the knowledge is not going to be easy - I don't think you will have much luck trying to hire "young" COBOL/DB2/CICS programmer - not even if you offered to train them. These outdated skills are as much in demand as the newer technologies and the only probable reason you don't see a lot of action is because these jobs are all taken today and people are dropping off in ones and twos - at least for now.

Having said that, there is no alternative to staying current on newer technologies and trying to move up the ladder. Once you reach the salary mean the only alternative to increasing your compensation is by either changing jobs or getting promoted. We live in a disruptive world. No university can prepare you for the unknown but they can prepare you to expect change - the only constant after all is change!

My thoughts after reading a blog on Employee Recognition Programs

Nice to see CEO's acknowledging that the leading challenge is how to best to develop, engage, motivate, manage, and retain Human Capital. (See blog - CEOs and Employee Recognition Programs, finally hand in hand?). Also agree employees need an environment to thrive and a recognition program to feel appreciated and secure.

I doubt there is any organization out there that would either acknowledge not having an Employee Recognition Program or, possibly even worse,  admitting having one that is not working. If these programs were working, employers would not have to resort to offering a retention bonus to at-risk employees. If you leave aside growth companies like Google and Apple aside, companies are focused on meeting quarterly numbers than real and meaningful long term investment in Human Capital - we are after all in a 7.5+% unemployment economy.

If these programs were really working, there would be no need to put in place retention bonuses for at-risk employees - specially when you realize a valued hard to replace employee is about to quit. I have been in such situations and have often wondered if a retention bonus really made a difference. An employee has nothing to loose by agreeing to a retention agreement and quitting anyway when a nice opportunity comes along. I once tried to convince the organization to turn the retention bonus agreement on its head and to make the payout now rather than the end of the retention period. Lets acknowledge the retention bonus as last ditch effort and increase the incentive to stick around. An employee that breaks such an agreement would have to pay the retention bonus back and even though there may be a small risk that the organization may not recover the money, I believe it is worth taking and using the time to work on how to increase employee retention.

Yahoo's Work From Home Policy

My first reaction when I saw the news item on Yahoo's work from home policy was that I had misread the article. More and more organizations are moving towards flexible work arrangements and it is certainly a surprise to see a SF Bay area organization like Yahoo issue a blanket policy. I have been following the comments and reactions in the news and the social media and this certainly is causing some waves.

What surprises me  most is the policy being applied to all of Yahoo - I presume no general exceptions. I admit I have had similar challenges in a recent role where I inherited an organization with a significant percentage of employees were remote/home based employees. In addition, the organization allowed flexible working arrangements including working part of the week from home, summer hours and more. This worked extremely well with those employees that had been with the company for a few years, had good domain knowledge, worked on mature applications and were more of what we called "individual contributors". However, the same cannot be said of new product development efforts that used Agile methodology, required a great deal of collaboration day in and day out, impromptu meetings etc. Travel budgets being what they are, there were very few opportunities to get the teams together. This caused a rethink of the policy of hiring new home based/remote employees on those efforts that required collaboration.

However, we continued to have the flexibility letting employees work from home on 1-2 days a week as well as allowing remote work arrangements where possible. I would rather have valued employees work from home than risk losing them completely. Good employees are not easy to find and the time and investment needed to bring new employees up to speed is simply not worth it. Only time will tell how this move turns out for Yahoo.

I imagine, Yahoo like,  most companies has employees, partners and customers all around the world. It was common, although never the expectation, for my employees to be on calls and respond to emails early in the morning and late at night. I have been on calls in the middle of night, sometimes with over 100 employees on the call, trying resolve a major outage. How does Yahoo expect to deal with these issues? If I am forced to be in the office everyday, maybe I should just leave my laptop locked up in my desk and my smartphone turned off. Maybe that might not be so bad after all!